The costs of going public attract both concerns of theoretical and practical circles. Along with the growing prosperity of market economy and the deeper reform of monetary system, China capital market has developed fast in the past twenty years and has expanded to a large extent of scale. Unlike the prosperity of capital market, prior literature mainly focuses on the issuance costs of going public, including the direct issuance costs like underwriting fees or audit fees and indirect issuance costs like IPO underpricing. In addition to this, prior literature pays little attention to indirect cost. Corporate income tax usually accounts for about 1/4~1/3 of corporate’s profit, so the effect of going public on the cost of corporate income tax would be an important aspect of indirect costs of going public, which provide an urgent question to the scholars.
The effect of going public on the cost of corporate income tax mainly reflects on the changes of tax planning behavior. Although the determinants, degree and economic consequences of corporate tax planning behavior has received extensive attention of theory and practice circles, literature on this field is still not much. Shackelford and Shevlin（2001）called for scholars to conduct more research on the determinants of tax planning behavior after reviewing the literature in tax fields. In a word, study on how going public affect tax planning behavior may enrich the literature on determinants of tax planning behavior to some extent.
In view of this, based on the effective tax planning framework proposed by Scholes et al.(2002), we think that going public affects tax planning behavior through this four paths: firstly, financial reporting costs of tax planning will increase due to more dispersed ownership; secondly, increased information disclosure requirements will increase the transaction costs of tax planning; thirdly, increased information disclosure requirements will also increase the tax audit costs of tax planning; finally, stock price protect mechanism will increase the stock price crash risk caused by “rent extraction” behavior which was hidden by tax planning behavior. Above all, we predict that non-tax costs of tax planning increase after going public, which will cause corporate to be less tax aggressiveness after going public. Besides, from the perspective of ownership and debt levels, we also propose two sub-hypothesis on cross-sectional differences of corporate tax aggressiveness change after going public. The first one is, compared with non-state-owned enterprises, state-owned enterprises’ tax aggressiveness decreases more after going public. The second one is, the decline level of tax aggressiveness after going public is positively related to the debt levels after going public.
In order to test above hypotheses, this paper uses effective tax rate and long-run effective tax rate to measure corporate tax aggressive. Our sample consists of initial public offering firms during 2002 to 2006, including pre and post 3 years (including IPO year) of the IPO year. The empirical results suggest: (1) after going public, both current effective tax rate and long-run effective tax rate increases significantly, which implies that corporates become less tax aggressive due to the non-tax cost of tax planning; (2) compared with non-state-owned enterprises, state-owned enterprises’ tax aggressiveness increases more significantly, which suggests state-owned enterprises become much less tax aggressive after going public; (3) debt level is positively related to the rise level of effective tax rate, which suggests that corporates with higher debt level become much less tax aggressive.
Our findings not only get empirical evidence on the determinants of tax planning, which enriches the tax planning literature, but also provide empirical evidence on the change of corporate income tax cost due to IPO, which has important reference value for practical circles. This paper finds that going public would decrease corporate’s tax aggressiveness, and the financial reporting costs have moderate effects on the change of tax aggressiveness. In the future, subsequent scholars may study further from other specific non-tax costs perspective, get more empirical evidence on the specific path of how going public affects corporate’s tax planning behavior.